DCIT, Bangalore V. Sri. Jivheshwara Credit Co-Operative Society Ltd., Bangalore

ITA 349/BANG/2014

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 4567 (ITAT-BANGALORE)
• Duration Of Justice: 6 year(s) 7 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-10-2020
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 14-05-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 12-03-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: JAYA KRISHNA
• Assessee Lawyers: PRIYADARSHI MISHRA
• Keywords: Business income; Transfer pricing; International transaction; Question of law
• Section: 13; 22

Judgement Text

IT(TP)A NOS.349 & 878/BANG/2014 M/S. MINDTREE LTD., BANGALORE IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH: BANGALORE BEFORE SHRI B. R. BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A NO.349/BANG/2014 ASSESSMENT YEAR: 2005-06 M/S. MINDTREE LIMITED (PREVIOUSLY KNOWN AS M/S. AZTECSOFT LIMITED NOW MERGED WITH M/S. MINDTREE LIMITED) GLOBAL VILLAGE, RVCE POST MYSORE ROAD BANGALORE-560 059 PAN NO : AABCA2122R VS. DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-11(1) BANGALORE APPELLANT RESPONDENT IT(TP)A NO.878/BANG/2014 ASSESSMENT YEAR: 2005-06 DEPUTY COMMISSIONER OF INCOME-TAX LTU BANGALORE VS. M/S. MINDTREE LIMITED (PREVIOUSLY KNOWN AS M/S. AZTECSOFT LIMITED NOW MERGED WITH M/S. MINDTREE LIMITED) GLOBAL VILLAGE, RVCE POST MYSORE ROAD BANGALORE-560 059 APPELLANT RESPONDENT APPELLANT BY : SHRI JAYA KRISHNA, A.R. RESPONDENT BY : SHRI PRIYADARSHI MISHRA, D.R. DATE OF HEARING : 21.10.2020 DATE OF PRONOUNCEMENT : 22.10.2020 IT(TP)A NOS.349 & 878/BANG/2014 M/S. MINDTREE LTD., BANGALORE PAGE 2 OF 17 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DATED 24- 04-2014 PASSED BY LD CIT(A)-IV, BANGALORE AND THEY RELATE TO THE ASSESSMENT YEAR 2005-06. 2. BOTH THE PARTIES HAVE FILED REVISED GROUNDS OF APPEAL. THE REVENUE IS CONTESTING FOLLOWING ISSUES:- (A) WHETHER THE LD CIT(A) WAS JUSTIFIED IN DIRECTIN G DEDUCTION OF SATELLITE LINK CHARGES FROM TOTAL TURNOVER ALSO WHILE COMPUTING DEDUCTION U/S 10A OF THE ACT. (B) RELIEF GRANTED IN RESPECT OF TRANSFER PRICING ADJUSTMENT. 3. THE ASSESSEE IS IN APPEAL IN RESPECT OF FOLL OWING ISSUES:- (A) WHETHER THE TAX AUTHORITIES ARE JUSTIFIED IN DE DUCTING SATELLITE LINK CHARGES FROM EXPORT TURNOVER WHILE C OMPUTING DEDUCTION U/S 10A OF THE ACT. (B) TRANSFER PRICING ADJUSTMENT SUSTAINED BY LD C IT(A). 4. FACTS RELATING TO THE CASE ARE DISCUSSED IN B RIEF. THE ORIGINAL NAME OF THE COMPANY WAS M/S AZTEC SOFTWARE & TECHNO LOGY SERVICES LTD. IT HAS MERGED WITH M/S MINDTREE LIMITED. THE ASSESSEE IS ENGAGED IN DEVELOPING SOFTWARE SOLUTIONS FOR ITS CU STOMERS IN USA. THE TRANSFER PRICING OFFICER (TPO) NOTICED THAT THE RE WERE CONTRADICTIONS BETWEEN TRANSFER PRICING REPORT AND AUDIT REPORT GIVEN IN FORM 3CEB WITH REGARD TO THE NATURE AND AMOUNT O F INTERNATIONAL TRANSACTIONS PERTAINING TO THIS YEAR. ULTIMATELY, THE TPO REJECTED THE TRANSFER PRICING STUDY OF THE ASSESSEE. IT(TP)A NOS.349 & 878/BANG/2014 M/S. MINDTREE LTD., BANGALORE PAGE 3 OF 17 5. THE TPO NOTICED THAT THE TURNOVER OF THE ASSE SSEE WAS RS.82.34 CRORES. THE TPO ADOPTED TRANSACTIONAL NET MARGIN M ETHOD (TNMM) AS MOST APPROPRIATE METHOD. HE ADOPTED OPERATING P ROFIT /OPERATING REVENUE (OP/OR) AS THE PROFIT LEVEL INDI CATOR. THE TPO, BY MAKING HIS OWN SEARCH, SELECTED FOLLOWING 17 COM PARABLE COMPANIES. SI. NO. COMPARABLES SELECTED BY TPO SALES (RS. IN CR.) OP TO TOTAL COST 1. BODHTREE CONSULTING LTD. 3.87 24.85 2. LANCO GLOBAL SYSTEMS LTD. 6.11 13.65 3. EXENSYS SOFTWARE SOLUTIONS LTD. 7.30 70.68 4. SANKHYA INFOTECH LTD. 12.99 27.39 5. SASKEN NETWORK SYSTEMS LTD. 14.44 16.64 6. FOUR SOFT LTD. 15.94 22.98 7. THIRDWARE SOLUTION LTD. 29.11 66.09 8. R S SOFTWARE (INDIA) LTD. 81.69 8.07 9. GEOMETRIC SOFTWARE SOLUTIONS 95.44 20.34 10. TATA ELXSI LTD. (SEG.) 146.46 24.35 11. VISUALSOFT TECHNOLOGIES LTD. 185.43 23.52 12. SASKEN COMMUNICATION 189.05 14.42 13. IGATE GLOBAL SOLUTIONS LTD. 406 4.32 14. FLEXTRONICS SOFTWARE SYSTEMS LTD. 457.45 32.19 15. L&T INFOTECH LTD. 562.45 10.33 16. SATYAM COMPUTER SERVICES LTD. 3464.2 29.44 17. INFOSYS TECHNOLOGIES LTD. 6859.7 42.83 ARITHMETICAL MEAN 26.59 6. THE AVERAGE MARGIN OF ABOVE SAID COMPARABLES CALCULATED AT OP/TC WAS 26.59% AND AT OP/OR WAS 21%. THE TPO CO MPUTED THE TRANSFER PRICING ADJUSTMENT AS UNDER:- IT(TP)A NOS.349 & 878/BANG/2014 M/S. MINDTREE LTD., BANGALORE PAGE 4 OF 17 TOTAL SALES OF THE TAX PAYER - 82,34,36,000 TOTAL COST BY APPLYING MARGIN OF 21% 65,05,14,440 (ALP OF COST) ACTUAL COST INCURRED BY THE TAX PAYER 70,10,27,000 BREAK UP OF ACTUAL COST :- PERTAINING TO UNRELATED PARTIES 53,98,36,000 PERTAINING TO RELATED PARTIES 16,11,91,000 THE TPO HELD THAT THE UNRELATED PARTY COSTS ARE AT ARMS LENGTH. ALP COST 65,05,14,440 LESS:- UNRELATED PARTIES COST 53,98,36,000 ------------------- ALP OF RELATED PARTY COSTS 11,06,78,440 ============= ACTUAL RELATED PARTY COSTS 16,11,91,000 (-) ALP OF RELATED PARTY COSTS 11,06,78,440 ------------------- TRANSFER PRICING ADJUSTMENT 5,05,12,560 ============ 7. DURING THE COURSE OF ARGUMENTS, THE LD A.R SU BMITTED THAT THE TPO HAS MADE TRANSFER PRICING ADJUSTMENT AT ENTITY LEVEL INSTEAD OF DOING THE SAME TO AE TRANSACTIONS. HOWEVER, THE CO MPUTATION MADE BY THE TPO WOULD SHOW THAT THE TPO HAS MADE ADJUSTM ENT IN RESPECT OF AE TRANSACTIONS ONLY. 8. THE AO COMPLETED THE ASSESSMENT BY MAKING THE TP ADJUSTMENT PROPOSED BY THE TPO. THE ASSESSEE CHALLENGED THE T RANSFER PRICING ADJUSTMENT MADE BY THE TPO BY FILING APPEAL BEFORE LD CIT(A). THE FIRST APPELLATE AUTHORITY EXCLUDED FOLLOWING FIVE C OMPARABLES ACCEPTING THE CONTENTION OF THE ASSESSEE FOR APPLIC ATION OF TURNOVER FILTER. IT(TP)A NOS.349 & 878/BANG/2014 M/S. MINDTREE LTD., BANGALORE PAGE 5 OF 17 SL. NO. NAME OF COMPANY TURNOVER (RS.IN CRORES) (A) IGATE GLOBAL 406 (B) FLETRONICS SOFTWARE SYSTEMS LTD 457. 45 (C) L & T INFOTECH LTD 562.45 (D) SATYAM COMPUTER SERVICES LTD 3464.20 (E) INFOSYS LTD 6859.70 IN THIS REGARD, THE LD CIT(A) FOLLOWED THE DECISION RENDERED BY BANGALORE BENCH OF TRIBUNAL IN THE CASE OF GENISYS INTEGRATING SYSTEMS VS. DCIT (15 ITR (TRIB) 475) AND CERTAIN OT HER DECISIONS, WHEREIN IDENTICAL VIEW HAS BEEN EXPRESSED. IN THE ABOVE SAID CASES, IT WAS HELD THAT THE COMPANIES HAVING TURNOVER OF L ESS THAN 200 CRORES CANNOT BE COMPARED WITH THE COMPANIES HAVING MORE THAN 200 CRORES. THE TURNOVER OF THE ASSESSEE COMPANY I S RS.82.34 CRORES AND HENCE IT FALLS UNDER THE CATEGORY OF COMPANIES HAVING TURNOVER OF 1 TO 200 CRORES. THE ABOVE SAID FIVE COMPANIES ARE HAVING TURNOVER OF MORE THAN 200 CRORES AND HENCE THE LD CIT(A) HEL D THAT THESE COMPANIES CANNOT BE CONSIDERED AS COMPARABLE COMPAN IES. 9. THE ASSESSEE ALSO SOUGHT EXCLUSION OF CERTAI N OTHER COMPANIES ON THE GROUND OF FUNCTIONAL DISSIMILARITY. THE LD CIT(A), HOWEVER, REJECTED THE SAME BY FOLLOWING CERTAIN CASE LAWS. ALL THOSE CASE LAWS HAD EXPRESSED THE VIEW THAT ONCE A COMPANY FALLS UN DER THE CATEGORY OF SOFTWARE DEVELOPMENT SERVICES, THEY CANNOT BE E XCLUDED MERELY ON THE REASON THAT THEY ARE OPERATING IN DIFFERENT VERTICALS. 10. THE REVENUE IS IN APPEAL CHALLENGING THE DE CISION OF LD CIT(A) IN EXCLUDING ABOVE SAID FIVE COMPARABLE COMPANIES. THE LD D.R PLACED HIS RELIANCE ON THE DECISION RENDERED BY TRI BUNAL IN THE CASE OF WILLS PROCESSING SERVICES INDIA (P) LTD AND ALSO IN THE CASE OF IT(TP)A NOS.349 & 878/BANG/2014 M/S. MINDTREE LTD., BANGALORE PAGE 6 OF 17 SOCIETE GENERALE GLOBAL SOLUTIONS P LTD AND CONTEND ED THAT THE TURNOVER FILTER IS NOT TO BE APPLIED. 11. ON THE CONTRARY, THE LD A.R SUPPORTED THE O RDER PASSED BY LD CIT(A) ON THIS ISSUE. 12. WE HEARD RIVAL CONTENTIONS AND PERUSED THE R ECORD. THE QUESTION OF APPLICATION OF TURNOVER FILTER WAS EXAM INED BY THE CO- ORDINATE BENCH IN A DETAILED MANNER IN THE CASE OF AUTODESK INDIA (P) LTD (2018)(96 TAXMANN.COM 263)(BANG.) AND IT WAS HE LD THAT THE TURNOVER FILTER CAN BE APPLIED. THE RELEVANT DISCU SSIONS AND DECISION TAKEN BY THE CO-ORDINATE BENCH ARE EXTRACTED BELOW FOR THE SAKE OF CONVENIENCE:- IT(TP)A NO.616/BANG/2013: REVENUE'S APPEAL FOR AY 2 005-06 17. THE FIRST ISSUE TO BE DECIDED IN REVENUE'S APPEAL IS THE APPLICATION OF TURNOVER FILTER FOR EXCLUSION OF COMPANIES THAT ARE OTHERWISE FOUND TO BE FUNCTIONALLY COMPARABLE. THE GRIEVANCE OF THE REVEN UE IN THIS REGARD IS PROJECTED IN GR.NO.2 OF THE GROUNDS OF APPEAL RAISE D BY THE REVENUE IN ITS APPEAL. THE BASIC FACTS TO BE NOTICED WITH REGARD A PPLICATION OF TURNOVER FILTER ARE THAT THE ASSESSEE'S TURNOVER FOR THE REL EVANT PREVIOUS YEAR WAS RS.10.65 CRORES. THE TPO EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES CHOSEN BY THE ASSESSEE IN ITS TP STUDY COMPANIES WH OSE TURNOVER WAS LESS THAN RS.1 CRORE. THE CONTENTION OF THE ASSESSEE BEF ORE THE CIT(A) WAS THAT WHILE THE TPO EXCLUDED COMPANIES WITH LOW TURNOVER, HE FAILED TO APPLY THE SAME YARDSTICK TO EXCLUDE COMPANIES WITH HIGH TURNO VER COMPARED TO THE ASSESSEE. THE REASON FOR EXCLUDING COMPANIES WITH L OW TURNOVER WAS THAT SUCH COMPANIES DO NOT REFLECT THE INDUSTRY TREND AS THEIR LOW COST TO SALES RATIO MADE THEIR RESULTS LESS RELIABLE. THE CONTENT ION OF THE ASSESSEE WAS THAT THERE WOULD BE EFFECT ON PROFITABILITY WHEREVER THE RE IS HIGH OR LOW TURNOVER AND THEREFORE COMPANIES WITH HIGH TURNOVER SHOULD A LSO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. THE CIT(A) AGREED WITH THE SUBMISSION OF THE ASSESSEE AND HE EXCLUDED THE FOLLOWING 5 COMPAN IES WHOSE TURNOVER WAS ABOVE RS.200 CRORES FROM THE LIST OF COMPARABLE COM PANIES, VIZ., (I) FLEXTRONICS LTD., (II) L & T INFOTECH LTD., (III) M /S. INFOSYS TECHNOLOGIES LTD., (IV) SATYAM COMPUTER SERVICES LTD., (V) IGATE GLOBA L SOLUTIONS LTD. THE CIT(A) IN COMING TO THE ABOVE CONCLUSION PLACED REL IANCE ON THE DECISION OF THE ITAT BANGALORE IN THE CASE OF GENISYS INTEGRATI NG SYSTEMS (INDIA) (P) LTD. V. DY. CIT [2012] 53 SOT 159/20 TAXMANN.COM 715 (BANG.) WHEREIN IT WAS HELD WHEN THERE IS A LIMIT FOR THE LOWER END FO R IDENTIFYING THE IT(TP)A NOS.349 & 878/BANG/2014 M/S. MINDTREE LTD., BANGALORE PAGE 7 OF 17 COMPARABLE COMPANIES, THERE IS NO REASON WHY THERE SHOULD NOT BE AN UPPER LIMIT ALSO, AS SIZE MATTERS IN BUSINESS. 17.1 THE LEARNED DR SUBMITTED THAT HIGH TURNOVER IS NOT A RELEVANT CRITERION TO REGARD A COMPANY AS NOT COMPARABLE, SO LONG AS T HE TWO COMPANIES ARE FUNCTIONALLY COMPARABLE. IF FUNCTIONS BY TWO COMPAN IES ARE IDENTICAL THEN THEY HAVE TO BE REGARDED AS COMPARABLE. ACCORDING T O HIM THEREFORE THE CIT(A) WAS NOT JUSTIFIED IN EXCLUDING 5 COMPANIES O N THE GROUND THAT THEIR TURNOVER WAS ABOVE RS.200 CRORES AND CANNOT BE COMP ARED WITH THE ASSESSEE WHOSE TURNOVER WAS AROUND RS.10.65 CRORES. IN SUPPORT OF HIS CONTENTION THE LEARNED DR PLACED RELIANCE ON THE FO LLOWING DECISIONS: SL. NO. NAME OF THE CASE CITATION RELEVANT PARAGRAPH 1. NTT DATA GLOBAL DELIVERY SERVICES LTD. V. ASSTT. CIT [2016] 69 TAXMANN.COM 7 (BANG. - TRIB.) 23 & 24 2. LSI TECHNOLOGIES INDIA PVT. LTD. V. ITO [2016] 70 TAXMANN.COM 189 (BANG. - TRIB.) 14.3 4. SOCIETE GENERALE GLOBAL SOLUTION CENTRE (P.) LTD. V. DY. CIT [2016] 69 TAXMANN.COM 336 (BANG. - TRIB.) 10 5. WILLIS PROCESSING SERVICES (I) (P.) LTD. V. DY. CIT [2013] 30 TAMANN.COM 350/57 SOT 339 (MUM.) 47 6. CAPGEMINI INDIA (P.) LTD. V. ASSTT. CIT [2015] 58 TAXMANN.COM 175/232 TAXMAN 149 (BOM.) 4.3 17.2 THE LEARNED DR ALSO FILED BEFORE US A NOTE CONTEND ING THAT IN SOFTWARE INDUSTRY, SIZE HAS NO INFLUENCE ON THE MARGINS EARN ED BY AN ENTITY. ACCORDING TO HIM ECONOMIES OF SCALE ARE RELEVANT ONLY IN CAPI TAL INTENSIVE COMPANIES WHICH HAVE SUBSTANTIAL FIXED ASSETS IN THE FORM OF PLANT AND MACHINERY. ACCORDING TO HIM, IN SOFTWARE INDUSTRY, SIZE DOES N OT MATTER, WHAT MATTERS IS THE HUMAN CAPITAL. ACCORDING TO HIM APPLICATION OF THE FILTER OF TURNOVER MIGHT BE JUSTIFIED FOR EXCLUDING COMPANIES WITH LOW TURNOVER OF SAY RS.1 CRORE OR LESS BECAUSE THE MARGIN EARNED BY THESE CO MPANIES MIGHT WIDELY FLUCTUATE DUE TO NARROW CAPITAL BASE AND LACK OF CO MPETITIVE STRENGTH, LACK OF OPERATIONAL EFFICIENCIES AND ALSO LACK OF HUMAN RESOURCES. THEY ALSO ESCAPE THE EYES OF REGULATORS. HE DREW OUR ATTENTIO N TO THE TURNOVER AND PROFIT MARGINS OF COMPANY INFOSYS TECHNOLOGIES LTD. FOR FY 1997 TO 2010 AND SUBMITTED THAT IN FY 1997 THE COMPANY HAD TURNO VER OF RS.139 CRORES AND ITS PROFIT MARGIN WAS 34.95% WHEREAS IN FY 2010 ITS TURNOVER WAS RS.21140 CRORES BUT ITS PROFIT MARGIN WAS ONLY 44.9 1%. ACCORDING TO HIM THEREFORE THE PROFIT MARGINS HOVER BETWEEN 35% AND 40% OVER THE PERIOD OF 15 YEARS AND THEREFORE HIGH TURNOVER DOES NOT NECES SARILY MEAN HIGH PROFIT MARGINS. HE ALSO GAVE A CHART SHOWING TURNOVER AND MARGIN OF 20 COMPANIES IT(TP)A NOS.349 & 878/BANG/2014 M/S. MINDTREE LTD., BANGALORE PAGE 8 OF 17 IN THE IT-BPO INDUSTRY FOR THREE YEARS. ACCORDING T O HIM THE CHART WOULD SHOW THAT FOR THE SAME RANGE OF TURNOVER COMPANIES EARNED DIFFERENT PROFIT MARGINS. THEREFORE ACCORDING TO HIM THERE IS NO REL ATION BETWEEN THE MARGINS EARNED AND THE TURNOVER OF A COMPANY. ACCOR DING TO HIM SOFTWARE INDUSTRIES OPERATE ON THE BASIS OF COST PLUS MARGIN OF PROFITS AND THEREFORE TURNOVER WOULD BE IRRELEVANT AND HAVE NO IMPACT OF THE PROFIT MARGINS. HIS FURTHER SUBMISSION WAS THAT UNDER RULE 10B(3) OF TH E INCOME TAX RULES, 1962 (RULES) IT IS ONLY FUNCTIONS PERFORMED, ASSETS EMPLOYED AND THE RISKS ASSUMED THAT ARE RELEVANT CRITERIA FOR COMPARISON A ND TURNOVER IS NOT A PRESCRIBED CRITERION FOR THE PURPOSE OR COMPARISON. HE FAIRLY ADMITTED THAT THERE ARE DIFFERENCES OF OPINION AMONGST VARIOUS BE NCHES OF THE TRIBUNAL ON THE APPLICATION OF TURNOVER FILTER AND THAT SOME BE NCHES HAVE HELD THAT HIGH TURNOVER WAS RELEVANT CRITERIA FOR EXCLUDING COMPAR ABLE COMPANIES. HIS PRAYER IN THE ALTERNATIVE WAS FOR CONSTITUTION OF A SPECIAL BENCH TO RESOLVE THE CONFLICT. 17.3 PER CONTRA THE LEARNED COUNSEL FOR THE ASSESSEE SU BMITTED THAT ITAT BANGALORE BENCH IN THE CASE OF DELL INTERNATIONAL S ERVICES INDIA (P) LTD. V. DY. CIT [2018] 89 TAXMANN.COM 44 ORDER DATED 13.10.2017, CONSIDERED THE VARIOUS ASPECTS OF APPLICATION OF TU RNOVER FILTER FOR EXCLUDING COMPANIES AND HAS NOTED THAT THE FIRST DECISION REN DERED ON APPLICATION OF THIS FILTER WAS IN THE CASE OF GENISYS INTEGRATING SYSTEMS (I)(P) LTD. (SUPRA) RENDERED ON 5.8.2011. IN THE CASE OF DELL INTERNATI ONAL SERVICES INDIA (P) LTD. (SUPRA), THE TRIBUNAL TOOK NOTE OF A DIVERGENT VIEW EXPRESSED BY ITAT BANGALORE BENCH IN THE CASE OF ROBERT BOSCH ENGG. A ND BUSINESS SOLUTIONS LTD. V. DY. CIT ITA NO.1519/BANG/2013 ORDER DATED 1 3.9.2017 AFTER CONSIDERING THE DECISION RENDERED BY THE HON'BLE DE LHI HIGH COURT IN THE CASE OF CHRYSCAPITAL INVESTMENT ADVISORS INDIA (P.) LTD. V. DY. CIT [2017] 82 TAXMANN.COM 167 (DELHI - TRIB.) , THAT HIGH TURNOVER IPSO FACTO DOES NOT LEAD TO THE CONCLUSION THAT A COMPANY WHICH IS OTHE RWISE COMPARABLE ON FAR ANALYSIS CAN BE EXCLUDED AND THAT THE EFFECT OF SUCH HIGH TURNOVER ON THE MARGIN SHOULD BE SEEN. THE TRIBUNAL IN THE CASE OF DELL INTERNATIONAL (SUPRA) ALSO TOOK NOTE OF THE DECISIO N OF THE ITAT BANGALORE BENCH IN THE CASE OF SYSARRIS SOFTWARE (P.) LTD. V. DY. CIT [2016] 67 TAXMANN.COM 243 (BANG. - TRIB) WHEREIN THE TRIBUNAL AFTER NOTICING THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CAS E OF CHRYSCAPITAL INVESTMENT ADVISORS INDIA (P.) LTD. (SUPRA) AND THE DECISION TO THE CONTRARY IN THE CASE OF CIT V. PENTAIR WATER INDIA (P.) LTD. [2016] 69 TAXMANN.COM 180/381 ITR 216 (BOM.) WHEREIN IT WAS HELD THAT HIGH TURNOVER IS A GROUND TO EXCLUDE A COMPANY FROM THE LIST OF COMPARABLE CO MPANIES IN DETERMINING ALP, HELD THAT THERE WERE CONTRARY VIEWS ON THE ISS UE AND HENCE THE VIEW FAVOURABLE TO THE ASSESSEE LAID DOWN IN THE CASE OF PENTAIR WATER INDIA (P.) LTD. (SUPRA) SHOULD BE ADOPTED. THE FOLLOWING WERE THE CONCLUSIONS OF THE TRIBUNAL IN THE CASE OF DELL INTERNATIONAL (SUPRA): '41. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS. ITAT BANGALORE BENCH IN THE CASE OF GENESIS INTEGRA TING SYSTEMS (INDIA) PVT. LTD. V. DCIT, ITA NO.1231/BANG/2010, RELYING O N DUN AND BRADSTREET'S ANALYSIS, HELD GROUPING OF COMPANIES H AVING TURNOVER OF RS. IT(TP)A NOS.349 & 878/BANG/2014 M/S. MINDTREE LTD., BANGALORE PAGE 9 OF 17 1 CRORE TO RS.200 CRORES AS COMPARABLE WITH EACH OT HER WAS HELD TO BE PROPER. THE FOLLOWING RELEVANT OBSERVATIONS WERE BR OUGHT TO OUR NOTICE: '9. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THE RIVAL CONTENTIONS AND ALSO THE JUDICIAL PRECEDENTS ON THE ISSUE, WE FIND THAT THE TPO HIMSELF HAS REJECTED THE COMPANIES WHICH .IRE ( SIC) MAKING LOSSES AS COMPARABLES. THIS SHOWS THAT THERE IS A LIMIT FOR T HE LOWER END FOR IDENTIFYING THE COMPARABLES. IN SUCH A SITUATION, W E ARE UNABLE TO UNDERSTAND AS TO WHY THERE SHOULD NOT BE AN UPPER L IMIT ALSO. WHAT SHOULD BE UPPER LIMIT IS ANOTHER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE SIZE MATTERS IN BUSINESS. A BIG COMPANY WOULD BE IN A POSITION TO B ARGAIN THE PRICE AND ALSO ATTRACT MORE CUSTOMERS. IT WOULD ALSO HAVE A B ROAD BASE OF SKILLED EMPLOYEES WHO ARE ABLE TO GIVE BETTER OUTPUT. A SMA LL COMPANY MAY NOT HAVE THESE BENEFITS AND THEREFORE, THE TURNOVER ALS O WOULD COME DOWN REDUCING PROFIT MARGIN. THUS, AS HELD BY THE VARIOU S BENCHES OF THE TRIBUNAL, WHEN COMPANIES WHICH ARC LOSS MAKING ARE EXCLUDED FROM COMPARABLES, THEN THE SUPER PROFIT MAKING COMPANIES SHOULD ALSO BE EXCLUDED. FOR THE PURPOSE OF CLASSIFICATION OF COMP ANIES ON THE BASIS OF NET SALES OR TURNOVER, WE FIND THAT A REASONABLE CL ASSIFICATION HAS TO BE MADE. DUN & BRADSTREET & BRADSTREET AND NASSCOM HAV E GIVEN DIFFERENT RANGES. TAKING THE INDIAN SCENARIO INTO C ONSIDERATION, WE FEEL THAT THE CLASSIFICATION MADE BY DUN & BRADSTREET IS MORE SUITABLE AND REASONABLE. IN VIEW OF THE SAME, WE HOLD THAT THE T URNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOVER OF RS .1.00 CRORE TO 200 CRORES HAVE TO BE TAKEN AS A PARTICULAR RANGE AND T HE ASSESSEE BEING IN THAT RANGE HAVING TURNOVER OF 8.15 CRORES, THE COMP ANIES WHICH ALSO HAVE TURNOVER OF 1.00 TO 200.00 CRORES ONLY SHOULD BE TA KEN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STUDY.' 42. THE ASSESSEE'S TURNOVER WAS AROUND RS.110 CRORE S. THEREFORE THE ACTION OF THE CIT(A) IN DIRECTING TPO TO EXCLUDE COMPANIES HAVING TURNOVER OF MORE THAN RS.200 CRORES AS NOT COMPARABLE WITH THE ASSESSEE WAS JUSTIFIED. AS RIGHTLY POINTED OUT BY THE LEARNED COUNSEL FOR T HE ASSESSEE, THERE ARE TWO VIEWS EXPRESSED BY TWO HON'BLE HIGH COURTS OF BOMBA Y AND DELHI AND BOTH ARE NON-JURISDICTIONAL HIGH COURTS. THE VIEW EXPRES SED BY THE BOMBAY HIGH COURT IS IN FAVOUR OF THE ASSESSEE AND THEREFORE FO LLOWING THE SAID VIEW, THE ACTION OF THE CIT(A) EXCLUDING COMPANIES WITH TURNO VER OF ABOVE RS.200 CRORES FROM THE LIST OF COMPARABLE COMPANIES IS HEL D TO CORRECT AND SUCH ACTION DOES NOT CALL FOR ANY INTERFERENCE.' 17.4 HIS SUBMISSION WAS THAT THE DECISION RENDERED BY T HE HON'BLE DELHI HIGH COURT IN THE CASE OF CHRYSCAPITAL INVESTMENT A DVISORS INDIA (P.) LTD. (SUPRA) WAS NOT ON THE APPLICATION OF TURNOVER FILTER. HE BROUGHT TO OUR NOTICE THAT THE RELEVANT SUBSTANTIAL QUESTION OF LA W IN THE CASE OF CHRISTCAPITAL DECIDED BY THE HON'BLE DELHI HIGH COU RT WAS (I) WHETHER COMPARABLES CAN BE REJECTED ON THE GROUND THAT THEY HAVE EXCEPTIONALLY HIGH PROFIT MARGINS AS COMPARED TO THE ASSESSEE IN TRANS FER PRICING ANALYSIS.(II) WHETHER FACTORS LIKE DIFFERENTIAL FUNCTIONAL AND RI SK PROFILE COUPLED WITH HIGH IT(TP)A NOS.349 & 878/BANG/2014 M/S. MINDTREE LTD., BANGALORE PAGE 10 OF 17 DEGREE OF VOLATILITY IN OPERATING PROFIT MARGINS IS SUFFICIENT GROUND TO REJECT COMPARABLES FOR TRANSFER PRICING ANALYSIS. IN ANSWE RING THE ABOVE QUESTION, THE HON'BLE COURT HOWEVER AT PAGE 218 OF THE REPORT (THE SAID DECISION IS CHRYSCAPITAL INVESTMENT ADVISORS INDIA (P.) LTD. (SUPRA)) OBSERVED THAT THE MERE CIRCUMSTANCE THAT A COMPANY-OTHERWISE CONF IRMING TO THE STIPULATIONS IN RULE 10B(2) OF THE RULES IN ALL DET AILS, PRESENTING A PECULIAR FEATURE- SUCH AS A HUGE PROFIT OR A HUGE TURNOVER, IPSO FACTO DOES NOT LEAD TO ITS EXCLUSION. THE COURT FURTHER OBSERVED THAT THE TRANSFER PRICING OFFICER, FIRST, HAS TO BE SATISFIED THAT SUCH DIFFERENCES DO NOT 'MATERIALLY AFFECT THE PRICE . OR COST'. SECONDLY, AN ATTEMPT TO MAKE R EASONABLE ADJUSTMENT TO ELIMINATE THE MATERIAL EFFECT OF SUCH DIFFERENCE S HAS TO BE MADE. ACCORDING TO HIM THEREFORE THE OBSERVATIONS OF THE HON'BLE DE LHI HIGH COURT IN SO FAR AS IT RELATES TO APPLICATION OF TURNOVER FILTER ARE OBITER DICTUM. OBITER DICTUM THOUGH IS ENTITLED TO A WEIGHT CANNOT BE EQUATED WI TH RATIO DECIDENDI OF A CASE. IN SUPPORT OF HIS CONTENTION AS ABOVE, HE REL IED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF DIRECTOR OF SE TTLEMENTS A.P. V. M.R. APPARAO [2002] 4 SCC 638. COUNTERING THE SUBMISSION OF THE LEARNED DR THAT THE DECISION OF THE HON'BLE BOMBAY HIGH COURT RENDERED IN THE CASE OF PENTAIR (SUPRA) IS NOT RATIO DECIDENDI AS IT WAS MERELY DISMISSAL OF APPEAL U/S.260A OF THE ACT ON THE GROUND THAT NO SUBSTANTI AL QUESTION OF LAW AROSE FOR CONSIDERATION, LEARNED COUNSEL DREW OUR ATTENTI ON TO THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF PENTAIR WATER INDI A (P.) LTD. (SUPRA) PARAGRAPH 9, WHEREIN THE HON'BLE BOMBAY HIGH COURT AFTER REFERRING TO A DECISION OF THE HON'BLE DELHI HIGH COURT RENDERED I N THE CASE OF CIT V. AGNITY INDIA TECHNOLOGIES (P) LTD. [2013] 36 TAXMANN.COM 289/219 TAXMAN 26 (DELHI) , CLEARLY OBSERVED THAT TURNOVER IS OBVIOUSLY A RELEVANT FACT TO CONSIDER THE COMPARABILITY. OUR AT TENTION WAS ALSO DRAWN TO PARAGRAPH-3 OF THE DECISION RENDERED IN THE CASE OF PENTAIR (SUPRA) WHEREIN THE DEPARTMENT SPECIFICALLY CONTENDED THAT THE TRIB UNAL ERRED IN HOLDING THAT SIZE AND TURNOVER OF A COMPANY ARE DECIDING FACTORS FOR TREATING A COMPANY AS COMPARABLE. ACCORDING TO HIM THEREFORE IT WAS NO T A CASE OF MERELY DISMISSAL OF APPEAL U/S.260A OF THE ACT AS UNADMITT ED ON THE GROUND THAT NO SUBSTANTIAL QUESTION OF LAW AROSE FOR CONSIDERATION BUT WAS PRECEDENT IN SO FAR AS THE HON'BLE COURT HAS EXPRESSED A CLEAR OPIN ION ON THE ISSUE. 17.5 THE LEARNED COUNSEL FOR THE ASSESSEE ALSO DREW OUR ATTENTION TO A DECISION OF THE HON'BLE DELHI HIGH COURT RENDERED I N THE CASE OF PR. CIT V. NEW RIVER SOFTWARE SERVICES (P) LTD. [2017] 85 TAXMANN.COM 302 WHEREIN THE HON'BLE DELHI HIGH COURT FOLLOWED THE DECISION OF THE HON'BLE BOMBAY HIGH COURT RENDERED IN THE CASE OF P ENTAIR (SUPRA) AND HELD THAT INFOSYS BPO WAS RIGHTLY EXCLUDED AS NOT B EING A COMPARABLE COMPANY. OUR ATTENTION WAS ALSO DRAWN BY HIM TO A D ECISION OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT V. M ERCER CONSULTING (I) (P) LTD. [2016] 76 TAXMANN.COM 153/390 ITR 615 WHEREIN THE HON'BLE COURT HELD THAT A GIANT COMPANY CANNOT BE COMPARED WITH A COMPANY WHICH WAS A CAPTIVE SERVICE PROVIDED ASSUMING LIMITED RISKS. 17.6 AS FAR AS THE DECISIONS OF THE TRIBUNAL RENDERED O N THE APPLICATION OF TURNOVER FILTER THAT ARE CONTRARY TO THE DECISION R ENDERED IN THE CASE IT(TP)A NOS.349 & 878/BANG/2014 M/S. MINDTREE LTD., BANGALORE PAGE 11 OF 17 OF GENISYS INTEGRATING SYSTEMS (SUPRA), THE FIRST S UBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE WAS THAT THOSE DECISIONS W ERE RENDERED AT A LATER POINT OF TIME AND WERE TO BE REGARDED AS PER INCURI UM SINCE THESE DECISIONS WERE ALSO RENDERED BY A BENCH OF EQUAL STRENGTH AND EITHER THE SUBSEQUENT DECISIONS REFUSED TO FOLLOW OR WERE RENDERED IN IGN ORANCE OF AN EARLIER BINDING PRECEDENT. HE SUBMITTED THAT IF A BENCH OF EQUAL STRENGTH DIFFERS WITH A VIEW TAKEN EARLIER, THE PROPER COURSE FOR THEM IS TO MAKE A REFERENCE TO LARGER BENCH. THEY CANNOT REFUSE TO FOLLOW A BINDIN G DECISION. IF THEY DO SO, THE DECISIONS SO RENDERED HAVE TO BE REGARDED AS PE R INCURIUM. EVEN IF THEY ARE RENDERED IN IGNORANCE OF THE EARLIER BINDING PR ECEDENT, THEY HAVE TO BE REGARDED AS PER INCURIUM. IN THIS REGARD THE LEARNE D COUNSEL FOR THE ASSESSEE PLACED RELIANCE ON THE DECISIONS OF HON'BLE SUPREME COURT IN THE CASE OF UNION OF INDIA V. RAGHUBIR SINGH AIR 1989 SC 193 3, UNION OF INDIA V. S.K. KAPOOR [2011] 4 SCC 589 AND SUNDEEP K UMAR BAFNA V. STATE OF MAHARASHTRA [2014] 16 SCC 623. IN THE AFORESAID DECISIONS THE HON'BLE SUPREME COURT HELD THAT IN A SITUATION WHERE THERE ARE CONFLICTING DECISIONS OF HIGH COURT ON AN ISSUE WHICH ARE IRRECONCILEABLE AND PRONOUNCED BY JUDGES OF CO-EQUAL STRENGTH, THEN THE EARLIER VIEW HAS TO BE FOLLOWED AS THE LATER DECISION HAS TO BE REGARDED AS PER INCURIAM. THE HON'BLE SUPREME COURT IN THE CASE OF SUNDEEP KUMAR BAFNA (SUPRA) HE LD THAT A DECISION OR JUDGMENT CAN ALSO BE PER INCURIAM IF IT IS NOT POSS IBLE TO RECONCILE ITS RATIO WITH THAT OF A PREVIOUSLY PRONOUNCED JUDGMENT OF A CO-EQUAL OR LARGER BENCH AND WHEN HIGH COURTS ENCOUNTER TWO OR MORE MU TUALLY IRRECONCILABLE DECISIONS OF THE SUPREME COURT CITED AT THE BAR, TH E INVIOLABLE RECOURSE IS TO APPLY THE EARLIEST VIEW AS THE SUCCEEDING ONES WOUL D FALL IN THE CATEGORY OF PER INCURIAM. THE FOLLOWING WERE THE RELEVANT OB SERVATIONS OF THE HON'BLE SUPREME COURT: '19. IT CANNOT BE OVER-EMPHASISED THAT THE DISCIPLI NE DEMANDED BY A PRECEDENT OR THE DISQUALIFICATION OR DIMINUTION OF A DECISION ON THE APPLICATION OF THE PER INCURIAM RULE IS OF GREAT IM PORTANCE, SINCE WITHOUT IT, CERTAINTY OF LAW, CONSISTENCY OF RULINGS AND CO MITY OF COURTS WOULD BECOME A COSTLY CASUALTY. A DECISION OR JUDGMENT CA N BE PER INCURIAM ANY PROVISION IN A STATUTE, RULE OR REGULATION, WHICH W AS NOT BROUGHT TO THE NOTICE OF THE COURT. A DECISION OR JUDGMENT CAN ALS O BE PER INCURIAM IF IT IS NOT POSSIBLE TO RECONCILE ITS RATIO WITH THAT OF A PREVIOUSLY PRONOUNCED JUDGMENT OF A CO-EQUAL OR LARGER BENCH; OR IF THE D ECISION OF A HIGH COURT IS NOT IN CONSONANCE WITH THE VIEWS OF THIS C OURT. IT MUST IMMEDIATELY BE CLARIFIED THAT THE PER INCURIAM RULE IS STRICTLY AND CORRECTLY APPLICABLE TO THE RATIO DECIDENDI AND NOT TO OBITER DICTA. IT IS OFTEN ENCOUNTERED IN HIGH COURTS THAT TWO OR MORE MUTUALL Y IRRECONCILABLE DECISIONS OF THE SUPREME COURT ARE CITED AT THE BAR . WE THINK THAT THE INVIOLABLE RECOURSE IS TO APPLY THE EARLIEST VIEW A S THE SUCCEEDING ONES WOULD FALL IN THE CATEGORY OF PER INCURIAM.' IT WAS THEREFORE SUBMITTED BY HIM THAT THE EARLIEST VIEW RENDERED BY THE ITAT BANGALORE BENCH IN THE CASE OF GENISYS INTEGRATING (SUPRA) SHOULD BE FOLLOWED. IT(TP)A NOS.349 & 878/BANG/2014 M/S. MINDTREE LTD., BANGALORE PAGE 12 OF 17 17.7 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE SUBS TANTIAL QUESTION OF LAW (QUESTION NO.1 TO 3) WHICH WAS FRAMED BY THE HO N'BLE DELHI HIGH COURT IN THE CASE OF CHRYSCAPITAL INVESTMENT ADVISORS (IN DIA) PVT. LTD., (SUPRA) WAS AS TO WHETHER COMPARABLE CAN BE REJECTED ON THE GRO UND THAT THEY HAVE EXCEPTIONALLY HIGH PROFIT MARGINS OR FLUCTUATION PR OFIT MARGINS, AS COMPARED TO THE ASSESSEE IN TRANSFER PRICING ANALYSIS. THERE FORE AS RIGHTLY SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THE OBSERVA TIONS OF THE HON'BLE HIGH COURT, IN SO FAR AS IT REFERS TO TURNOVER, WERE IN THE NATURE OF OBITER DICTUM. JUDICIAL DISCIPLINE REQUIRES THAT THE TRIBUNAL SHOU LD FOLLOW THE DECISION OF A NON-JURISDICTION HIGH COURT, EVEN THOUGH THE SAID D ECISION IS OF A NON- JURISDICTIONAL HIGH COURT. WE HOWEVER FIND THAT THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF PENTAIR WATER INDIA (P.) LTD. (SUPRA) HAS TAKEN THE VIEW THAT TURNOVER IS A RELEVANT CRITERION FOR CHOOSING COMPANIES AS COMPARABLE COMPANIES IN DETERMINATION OF ALP IN TRANSFER PRICI NG CASES. THERE IS NO DECISION OF THE JURISDICTIONAL HIGH COURT ON THIS I SSUE. IN THE CIRCUMSTANCES, FOLLOWING THE PRINCIPLE THAT WHERE TWO VIEWS ARE AV AILABLE ON AN ISSUE, THE VIEW FAVOURABLE TO THE ASSESSEE HAS TO BE ADOPTED, WE RESPECTFULLY FOLLOW THE VIEW OF THE HON'BLE BOMBAY HIGH COURT ON THE ISSUE. RESPECTFULLY FOLLOWING THE AFORESAID DECISION, WE UPHOLD THE ORDER OF THE DRP EXCLUDING 5 COMPANIES FROM THE LIST OF COMPARABLE COMPANIES CHO SEN BY THE TPO ON THE BASIS THAT THE 5 COMPANIES TURNOVER WAS MUCH HIGHER COMPARED TO THAT THE ASSESSEE. 17.8 IN VIEW OF THE ABOVE CONCLUSION, THERE MAY NOT BE ANY NECESSITY TO EXAMINE AS TO WHETHER THE DECISION RENDERED IN THE CASE OF GENISYS INTEGRATING SYSTEMS (I) (P.) LTD. (SUPRA) BY THE IT AT BANGALORE BENCH SHOULD CONTINUE TO BE FOLLOWED. SINCE ARGUMENTS WER E ADVANCED ON THE CORRECTNESS OF THE DECISIONS RENDERED BY THE ITAT M UMBAI AND BANGALORE BENCHES TAKING A VIEW CONTRARY TO THAT TAKEN IN THE CASE OF GENISYS INTEGRATING SYSTEMS (I) (P.) LTD. (SUPRA), WE PROCE ED TO EXAMINE THE SAID ISSUE ALSO. ON THIS ISSUE, THE FIRST ASPECT WHICH W E NOTICE IS THAT THE DECISION RENDERED IN THE CASE OF GENISYS INTEGRATING SYSTEMS (I) (P.) LTD. (SUPRA) WAS THE EARLIEST DECISION RENDERED ON THE ISSUE OF COMP ARABILITY OF COMPANIES ON THE BASIS OF TURNOVER IN TRANSFER PRICING CASES. TH E DECISION WAS RENDERED AS EARLY AS 5.8.2011. THE DECISIONS RENDERED BY THE ITAT MUMBAI BENCHES CITED BY THE LEARNED DR BEFORE US IN THE CASE OF WI LLIS PROCESSING SERVICES (SUPRA) AND CAPEGEMINI INDIA (P.) LTD. (SU PRA) ARE TO BE REGARDED AS PER INCURIUM AS THESE DECISIONS IGNORE A BINDING CO-ORDINATE BENCH DECISION. IN THIS REGARD THE DECISIONS REFERRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE SUPPORTS THE PLEA OF THE LEARNED COUNS EL FOR THE ASSESSEE. THE DECISIONS RENDERED IN THE CASE OF NTT DATA (SUPRA), SOCIETE GENERALE GLOBAL SOLUTIONS (SUPRA) AND LSI TECHNOLOGIES (SUPR A) WERE RENDERED LATER IN POINT OF TIME. THOSE DECISIONS FOLLOW THE RATIO LAID DOWN IN WILLIS PROCESSING SERVICES (SUPRA) AND HAVE TO BE REGARDED AS PER INCURIUM. THESE THREE DECISIONS ALSO PLACE RELIANCE ON THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CHRISCAPITAL INVESTMENT (SUPRA ). WE HAVE ALREADY HELD THAT THE DECISION RENDERED IN THE CASE OF CHRISCAPI TAL INVESTMENT (SUPRA) IS OBITER DICTA AND THAT THE RATIO DECIDENDI LAID DOWN BY THE HON'BLE BOMBAY IT(TP)A NOS.349 & 878/BANG/2014 M/S. MINDTREE LTD., BANGALORE PAGE 13 OF 17 HIGH COURT IN THE CASE OF PENTAIR (SUPRA) WHICH IS FAVOURABLE TO THE ASSESSEE HAS TO BE FOLLOWED. THEREFORE, THE DECISIONS CITED BY THE LEARNED DR BEFORE US CANNOT BE THE BASIS TO HOLD THAT HIGH TURNOVER I S NOT RELEVANT CRITERIA FOR DECIDING ON COMPARABILITY OF COMPANIES IN DETERMINA TION OF ALP UNDER THE TRANSFER PRICING REGULATIONS UNDER THE ACT. FOR THE REASONS GIVEN ABOVE, WE UPHOLD THE ORDER OF THE CIT(A) ON THE ISSUE OF APPL ICATION OF TURNOVER FILTER AND HIS ACTION IN EXCLUDING COMPANIES BY FOLLOWING THE RATIO LAID DOWN IN THE CASE OF GENISYS INTEGRATING (SUPRA). WE HAVE NOTICED THAT THE LD CIT(A) HAS FOLLOWED THE DECISION RENDERED BY CO-ORDINATE BENCH IN THE CASE OF GENISYS INTEGRA TING SYSTEMS (SUPRA) AND THE DECISION RENDERED IN THE ABOVE SAID CASE WAS FOLLOWED IN THE AUTODESK INDIA (P) LTD EXTRACTED SUPRA. IN THE CASE OF AUTODESK INDIA (P) LTD, THE CO-ORDINATE BENCH HAS DISTINGUIS HED THE DECISIONS RELIED UPON BY LD D.R. ACCORDINGLY, WE UPHOLD THE ORDER OF LD CIT(A) IN EXCLUDING ABOVE SAID FIVE COMPARABLE COMPANIES A PPLYING TURNOVER FILTER. 13. WE SHALL NOW TAKE UP THE APPEAL OF THE ASSE SSEE. THOUGH THE ASSESSEE HAS RAISED MANY GROUNDS, THE LD A.R SUBMIT TED THAT THE ASSESSEE IS SEEKING EXCLUSION OF FOLLOWING FOUR COM PANIES UPHELD BY LD CIT(A):- (A) BODHTREE CONSULTING LTD (B) TATA ELXSI LTD (C) EXENSYS SOFTWARE SOLUTIONS LTD (D) THIRDWARE SOLUTION LTD. THE LD A.R SUBMITTED THAT ALL THE ABOVE SAID FOUR C OMPANIES WERE EXAMINED BY THE BANGALORE BENCH OF TRIBUNAL IN THE CASE OF CGI INFORMATION SYSTEMS & MANAGEMENT CONSULTANTS (P) LT D (IT(TP)A NO.612/BANG/2013) ON FUNCTIONALITY DIFFERENT BASIS. ACCORDINGLY, HE PRAYED FOR EXCLUSION OF ABOVE SAID FOUR COMPANIES. IT(TP)A NOS.349 & 878/BANG/2014 M/S. MINDTREE LTD., BANGALORE PAGE 14 OF 17 14. ON THE CONTRARY, THE LD A.R SUBMITTED THAT T HE LD CIT(A) HAS RELIED UPON CERTAIN CASE LAWS AND HELD THAT THE FUN CTIONALITY DIFFERENCE CANNOT BE A CRITERIA TO EXCLUDE THE COMP ANIES. 15. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSE D THE RECORD. WE NOTICE THAT THE BANGALORE BENCH OF TRIBUNAL HAS EXC LUDED ABOVE SAID FOUR COMPANIES HOLDING THAT THESE ARE NOT COMPARABL E COMPANIES IN THE CASE OF CGI INFORMATION SYSTEMS & MANAGEMENT CO NSULTANTS (P) LTD (SUPRA). THE RELEVANT DISCUSSIONS MADE BY THE TRIBUNAL IN RESPECT OF ABOVE SAID FOUR COMPANIES ARE EXTRACTED BELOW:- (A) BODHTREE CONSULTING LTD:- 15.2. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN LIGHT OF RECORDS PLACED BEFORE US. WE FIND THAT LD.CIT(A) DIRECTED THEIR EXCLUSION OF THESE COMPARABLES AS THEY ARE FUNCTIONALLY DISSIMILAR TO ASSESSEE. LD. CIT (A ) OBSERVED THAT ENGAGED IN DEVELOPING SOFTWARE PRODUCTS AND FOR THE REASON THAT THIS COMPANY WAS RENDERING BOTH SWD SERVICES AND WAS ALSO IN PROVIDI NG INFORMATION TECHNOLOGY ENABLED SERVICES (ITES) AND BREAK UP OF REVENUES FROM DIVERSE SEGMENTS WAS NOT AVAILABLE. THIS TRIBUNAL IN CASE O F SYSARRIS SOFTWARE (P.) LTD.VS.DCIT , REPORTED IN, (2016)67 TAXMANN.COM 243, IT(TP)A NO.612/BANG/2013 A. Y : 2005 - 06 WHEREIN VIDE PARA S 20-21, BODHTREE HAS BEEN HELD TO BE NOT FUNCTIONALLY COMPARABLE WITH A COMPANY PROVIDING SWD SERVICES. (B) TATA ELXSI LTD:- 17. GROUND NO. 6 IS AGAINST EXCLUSION OF TATA ELXSI LTD LD. CIT. DR SUBMITTED THAT THIS COMPANY IS INTO SOFTWARE DEVELO PMENT SERVICES AS PROVIDED IN THE ANNUAL REPORT OF THE COMPANY. HE AL SO SUBMITTED THAT THERE ARE SEGMENTAL INFORMATION AVAILABLE IN RESPECT OF B OTH THE SEGMENTS BEING SOFTWARE DEVELOPMENT SERVICES AND SYSTEM INTEGRATIO N AND SUPPORT SERVICES AND THEREFORE LD. CIT (A) SHOULD NOT HAVE EXCLUDED THE SAME. 17.1. LD.AR ON THE CONTRARY PLACING RELIANCE UPON V IEW EXPRESSED BY LD. CIT(A) SUBMITTED THAT THE SEGMENT SELECTED BY LD. T PO FOR PURPOSES OF COMPARABILITY COMPRISES OF SERVICES SUCH AS PRODUCT DESIGN, DESIGN ENGINEERING AND VISUAL COMPUTING LABS WHICH ARE IN THE NATURE OF IT ENABLED SERVICES, AND THEREFORE NOT COMPARABLE WITH SOFTWAR E DEVELOPMENT SERVICES IT(TP)A NOS.349 & 878/BANG/2014 M/S. MINDTREE LTD., BANGALORE PAGE 15 OF 17 PROVIDED BY ASSESSEE. HE ALSO PLACED RELIANCE UPON ORDERS PASSED BY THIS TRIBUNAL IN ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2007-08 REPORTED IN (2013) 36 TAXMANN.COM 374, ASSESSMENT YEAR 2008- 09 BY ORDER DATED 18/07/2014 IN ITA (TP) A NO. 1192/B/2012 IT(TP)A NO .612/BANG/2013 A. Y : 2005 - 06 AND ASSESSMENT YEAR 2009-10 BY COMMON O RDER DATED 18/03/2016 IN ITA(TP)A NO. 1621 AND 1664/BE/2014. 17.2. WE HAV E PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN LIGHT OF RECO RDS PLACED BEFORE US. WE NOTE THAT LD. CIT (A) EXCLUDED THIS COMPARABLE A S IT WAS ENGAGED IN DEVELOPMENT OF NICHE PRODUCTS AND SERVICES WHICH WA S ENTIRELY DIFFERENT FROM SERVICES RENDERED BY ASSESSEE TO ITS ASSOCIATED ENT ERPRISES. LD.CIT(A) CATEGORICALLY OBSERVED THAT REVENUE EARNED BY THIS COMPANY COMPRISES OF PRODUCTS AS WELL AND THEREFORE THOUGH THE COMPANY S ATISFIES THAT TURNOVER CRITERIA THE FUNCTIONAL DIFFERENCES REQUIRES IT TO BE ELIMINATED. WE DO NOT FIND ANY INFIRMITY IN THE OBSERVATIONS OF LD. CIT (A) AN D THE SAME IS UPHELD. (C) EXENSYS SOFTWARE SOLUTIONS LTD:- 18. GROUND NO.7 IS AGAINST EXCLUSION OF EXENSYS SOF TWARE SOLUTIONS LTD AND THIRDWERE SOLUTIONS LTD BY LD.CIT (A) LD.CIT.DR SUB MITTED THAT THESE COMPARABLES WERE EXCLUDED FOR HAVING ABNORMAL PROFI TS BY LD.CIT (A). LD.CIT DR REFERRED TO AND RELIED UPON HIS ARGUMENTS ADVANCED WHILE DEALING WITH GROUND NO. 2 ON TURNOVER FILTER CONSID ERED HEREIN ABOVE. 18.1. ON THE CONTRARY, LD.AR PLACED RELIANCE UPON DECISIO N OF THIS TRIBUNAL IN CASE OF ITO VS NET DEVICES PVT.LTD REPORTED IN [2015] 63 TAXMANN.COM 94. 18.2. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN LIGHT OF RECORDS PLACED BEFORE US. APART FROM THE FACT THAT, PROFIT MARGINS OF THESE C OMPANIES WERE ABNORMALLY HIGH OWING TO EXTRAORDINARY EVENTS THAT HAPPENED DU RING THE RELEVANT PREVIOUS YEAR, THESE TWO COMPANIES HAVE TO IT(TP)A NO.612/BANG/2013 A. Y : 2005 - 06 BE EXCLUDED ON THE GROUND THAT THESE TWO COMPANIES ARE FUNCTIONALLY DISSIMILAR TO THAT OF THE ASSESSEE WHI CH IS CONTRACT SOFTWARE SERVICE PROVIDER. AS FAR AS EXENSYS SOFTWARE SOLUTI ONS LTD., IS CONCERNED, WE HAVE ALREADY HELD THAT LD.CIT(A) WAS JUSTIFIED IN E XCLUDING THIS COMPANY FROM THE LIST OF COMPARABLE COMPANIES ON THE GROUND THAT ITS PROFITS WERE ABNORMALLY HIGH OWING TO EXTRAORDINARY EVENT OF MER GER/AMALGAMATION THAT TOOK PLACE DURING THE RELEVANT PREVIOUS YEAR. (D) THIRDWARE SOLUTIONS LTD:- 18.2.1. LD.AR SUBMITTED THAT THIRDWARE SOLUTIONS LT D., IS ENGAGED IN MULTIPLE DIVERSE ACTIVITIES IN FY 2004-05 INCLUDING (A) SOFTWARE DEVELOPMENT SERVICES UNDER WHICH THE COMPANY PROVIDES APPLICATI ON DEVELOPMENT, CUSTOMER RELATIONSHIP MANAGEMENT AND ERP; AND (B) S ALE OF SOFTWARE IT(TP)A NOS.349 & 878/BANG/2014 M/S. MINDTREE LTD., BANGALORE PAGE 16 OF 17 PRODUCT AND RELATED SERVICES, WITHOUT PROPER SEGMEN TAL DATA BEING AVAILABLE FOR THE SAID DIVERSE ACTIVITIES. 18.2.2. WE NOTE THAT IT IS FOR SUCH REASONS BANGALO RE ITAT IN NET DEVICES INDIA PVT. LTD. (SUPRA) AT PARAS 8.1-8.3 AND 9.1-9. 3 AT PAGES 15-19 AND 19- 21 RESPECTIVELY] EXCLUDED THESE COMPARABLES AS FUNC TIONALLY NOT SIMILAR SERVICE PROVIDER SUCH AS ASSESSEE. RESPECTFULLY FOL LOWING THE SAME WE UPHOLD OBSERVATIONS OF LEARN CIT (A). ACCORDINGLY THIS GROUND RAISED BY REVENUE STANDS DI SMISSED. 16. FOLLOWING ABOVE SAID DECISION OF THE TRIBUNA L, WE DIRECT EXCLUSION OF ABOVE SAID FOUR COMPANIES. THE AO/TPO SHALL RE- COMPUTE ALP OF THE INTERNATIONAL TRANSACTIONS ACCOR DINGLY. 17. THE ASSESSEE HAS RAISED A GROUND AS TO WHETHE R THE SATELLITE CHARGES INCURRED IN FOREIGN CURRENCY ARE REQUIRED T O BE REDUCED FROM EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S 10A O F THE ACT. THE REVENUE HAS RAISED A GROUND AS TO WHETHER THE LD CI T(A) WAS JUSTIFIED IN FOLLOWING THE DECISION OF KARNATAKA HIGH COURT R ENDERED IN THE CASE OF TATA ELXSI LTD, I.E., EXCLUSION OF EXPENSES INCURRED IN FOREIGN CURRENCY FROM BOTH EXPORT TURNOVER AND TOTAL TURNOV ER WHILE COMPUTING DEDUCTION U/S 10A OF THE ACT. THE LD A.R SUBMITTED THAT THE ASSESSEE WOULD BE SATISFIED, IF PARITY IS GIVEN IN RESPECT OF DEDUCTION FROM BOTH EXPORT TURNOVER AND TOTAL TURNO VER. 18. THE HON'BLE SUPREME COURT HAS SETTLED THIS ISSUE IN THE CASE OF CIT VS. HCL TECHNOLOGIES LTD (TS 218 SC -201 8). THE RELEVANT OBSERVATIONS MADE BY HON'BLE SUPREME COURT ARE EXTR ACTED BELOW:- 20. EVEN IN COMMON PARLANCE, WHEN THE OBJECT OF T HE FORMULA IS TO ARRIVE AT THE PROFIT FROM EXPORT BUSINESS, EX PENSES EXCLUDED FROM EXPORT TURNOVER HAVE TO BE EXCLUDED F ROM TOTAL TURNOVER ALSO. OTHERWISE, ANY OTHER INTERPRETATION MAKES THE FORMULA UNWORKABLE AND ABSURD. HENCE, WE ARE SATIS FIED THAT SUCH DEDUCTION SHALL BE ALLOWED FROM THE TOTAL TURN OVER IN SAME PROPORTION AS WELL. IT(TP)A NOS.349 & 878/BANG/2014 M/S. MINDTREE LTD., BANGALORE PAGE 17 OF 17 21. ON THE ISSUE OF EXPENSES ON TECHNICAL SERVICES PROVIDED OUTSIDE, WE HAVE TO FOLLOW THE SAME PRINCIPLE OF IN TERPRETATION AS FOLLOWED IN THE CASE OF EXPENSES OF FREIGHT, TELECOMMUNICATION ETC., OTHERWISE THE FORMULA OF CA LCULATION WOULD BE FUTILE. HENCE, IN THE SAME WAY, EXPENSES INCURRED IN FOREIGN EXCHANGE FOR PROVIDING THE TECHNICAL SERVIC ES OUTSIDE SHALL BE ALLOWED TO EXCLUDE FROM THE TOTAL TURNOVER . ACCORDINGLY, FOLLOWING THE DECISION RENDERED BY HON 'BLE SUPREME COURT, WE UPHOLD THE ORDER PASSED BY LD CIT(A) ON T HIS ISSUE. 19. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED AND THE APPEAL OF THE ASSESSEE IS TREATED AS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND OCT, 2020 SD/- (BEENA PILLAI) JUDICIAL MEMBER SD/- (B.R. BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED 22 ND OCT, 2020. VG/SPS COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.